The Republic of Ireland international finished last season as the second top scorer for Mick McCarthy's side, which led to him getting a recall for his national side after a six-year absence.
After scoring 13 goals for Town last season, Murphy has revealed that he finally feels settled.
He told the club's official website: "I'm really enjoying my football here so I'm obviously delighted to have signed a new contract.
"I've said before, Ipswich Town feels like home for me - both on and off the pitch. My family love the area and that's very important to me.
"We are making progress as a football club and the challenge now is to continue that next season and hopefully get into that top six. That's the target."
Murphy's signature caps a busy few days for the club, who completed the signing of Cameron Stewart after McCarthy and Stephen Hunt also committed their futures to the club.